BIG NAB (ASX:NAB) capital raising, is the share price a buy?

Big four ASX bank NAB (ASX: NAB) has announced a big capital raising today. Is the NAB share price a buy?

What is NAB?

NAB is one of the four largest financial institutions in Australia in terms of market capitalisation, earnings and customers. However, in 2018, it was Australia’s largest lender to businesses and has operations in wealth management and residential lending. It also operates the online-only Ubank.

What’s going on with NAB?

NAB recently announced a $1.1 billion profit hit due to some provisions and write-downs. This morning the company is announcing a big capital raising to ensure its balance sheet remains strong. Here’s an article from a month ago talking about what might happen.

How much is NAB raising?

NAB has announced a fully underwritten institutional share placement of $3 billion and a non-underwritten share purchase plan targeting $500 million.

The capital raising price is $14.15, which is a 8.5% discount to the last closing price.

The new shares issued will represent 7.1% of NAB’s existing shares.

NAB announces a dividend cut

NAB has announced a 30 cent per share fully franked dividend, which reflects a payout ratio of 35%, which excludes ‘large notable items’.

The NAB Board said it was a difficult decision which reflects a balance between returning capital to our shareholders and retaining a strong balance sheet in this environment.

It currently expects to continue to pay a dividend by the decision will be subject to regulatory requirements, the environment and performance at the time.

It seems NAB was indeed a yield trap.

Why is NAB doing a capital raising?

NAB said it’s taking proactive steps in light of the uncertain economic outlook due to the COVID-19 pandemic.

It’s intended to provide NAB with sufficient capacity to continue supporting customers as well as increasing NAB’s capital level to help manage in a range of possible scenarios, including a prolonged and severe economic downturn.

The capital raising will increase NAB’s ‘Common Equity Tier 1 Capital (CET1) ratio’ to 11.2%. At 31 March 2020 the CET1 ratio was 10.39%.

Is NAB’s leadership taking some pain too?

In the second half of FY20 the NAB chairman, directors and CEO will see their fixed remuneration reduced by 20%. The CEO and management will also not receive short term variable rewards for FY20.

Is the NAB share price a buy?

The amount of NAB loans that are 90+ days past due has been steadily increasing September 2018. It was up to 0.97% at March 2020.

NAB may be able to avoid some of the worst pain this year by giving payment holidays – it means banks are less likely to have to force property fire sales at much lower prices.

I don’t think I’d ever want to buy NAB for my portfolio for the long term. The capital raising is at an attractive discount, so that could be nice to pick up. But COVID-19 could be hurting the economy for many months, so I wouldn’t want to hold NAB throughout all of that period.

For the long term I’d much rather invest in these technology shares over NAB:

Disclosure: at the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.

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